What is a 403(b)?
The 403(b) is a tax deferred retirement plan available to employees of educational institutions and certain non-profit organizations as determined by section 501(c)(3) of the Internal Revenue Code. Contributions and investment earnings in a 403(b) grow tax deferred until withdrawal (assumed to be retirement), at which time they are taxed as ordinary income. See IRS Publication 571 for IRS details on the 403(b). You can also obtain this document by calling 1-800-829-3676.
When was the 403(b) established?
The 403(b) was established in 1958 by the federal government to encourage employees in certain tax-exempt organizations to establish retirement savings programs. The name refers to the relevant section in the Internal Revenue Code.
Who can contribute to a 403(b)?
Employees of tax-exempt organizations established under section 501(c)(3) of the Internal Revenue Code. These organizations are usually referred to as section 501(c)(3) organizations or simply 501(c)(3) organizations. Participants include teachers, school administrators, school personnel, nurses, doctors, professors, researchers, librarians, and ministers.
Why Contribute to a 403(b)?
A Healthy Retirement - Most employees of educational institutions and other non-profit organizations are provided with a pension upon retirement. Few pension plans, however, provide an amount equal to salary. A 403(b) plan can provide a healthy supplement to a pension.
Lower Taxes - 403(b) contributions are made on a pre-tax basis which can greatly reduce your tax bill. Generally, if you contribute $100 a month to a 403(b) plan, you've reduced your Federal income taxes by roughly $25 (assuming you are in the 25% tax bracket). In effect, your $100 contribution costs you only $75. The tax savings are magnified as your 403(b) contribution increases.
More Tax Savings - all dividends, interest and capital gains accumulate in a 403(b) account on a tax-deferred basis. This means your earnings will grow tax-free until time of withdrawal.
How does a 403(b) plan work?
You set aside money for retirement on a pre-tax basis through a salary reduction agreement with your employer. You choose from among the vendors offered by your employer where your money is to be invested. The money grows tax free until withdrawal at retirement.
Will participation in a 403(b) plan reduce Social Security benefits?
No. Salary reduction contributions to a 403(b) reduce taxable compensation for federal (and in most instances, state) income tax purposes only. Those contributions do not reduce wages for the purpose of determining FICA taxes or determining social security benefits.
Will participation in a defined benefit plan (pension/TRS) affect one's ability to contribute the maximum elective deferral limit to a 403(b) plan?
No. The elective deferral limit is a taxpayer limit, meaning that your maximum contribution to all plans cannot exceed the annual limit. However, your mandatory contribution to the state defined benefit plan is not considered an elective deferral, so it doesn't reduce your annual limit. Therefore, you are able to participate in your state's defined benefit plan and contribute the maximum allowable to your 403(b) plan.
Is there a special tax credit for low-income savers?
Yes. Eligible savers will receive a tax credit of up to 50 percent on up to $2,000 in contributions to an IRA, 403(b), 457, SIMPLE, 401(k) plan and other tax-favored plans. For 2008, the full credit is available to joint filers whose adjusted gross income (AGI) is less than $53,000, and for singles whose AGI is under $26,500.
What is a fixed annuity?
Fixed annuities are contracts with insurance companies that guarantee that you will earn a minimum rate of interest during the time that your account is growing. The insurance company also guarantees that the periodic payments will be a guaranteed amount per dollar in your account. These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse (source: SEC).
What is an equity indexed annuity?
Equity indexed annuities are a special type of contract between you and an insurance company. During the accumulation period — when you make either a lump sum payment or a series of payments — the insurance company credits you with a return that is based on changes in an equity index, such as the S&P 500 Composite Stock Price Index. The insurance company typically guarantees a minimum return. Guaranteed minimum return rates vary. After the accumulation period, the insurance company will make periodic payments to you under the terms of your contract, unless you choose to receive your contract value in a lump sum (source: SEC).
What is a variable annuity?
Variable annuities are contracts with insurance companies under which you make a lump-sum payment or series of payments into a tax deferred account. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date. You can choose to invest your purchase payments in a range of investment options, which are typically mutual funds. The value of your account in a variable annuity will vary, depending on the performance of the investment options you have chosen (source: SEC).
SEC variable annuity tip: Make sure that the features you are buying when you invest in a variable annuity are worth the money you are paying. If you invest in a variable annuity through a tax-advantaged retirement plan (such as a 403(b) plan), be aware that you receive no additional tax advantage from the variable annuity.
What is a mutual fund?
Mutual funds are pools of money invested in many different securities and are managed according to set objectives. They are similar to the investments underlying variable annuities, but do not have the associated insurance fees of an annuity. With mutual funds, you can choose among aggressive funds for growth to more conservative funds for stability similar to that of a fixed annuity. When comparing similar investments, it is important to consider all factors of an investment, including performance, fees, risk, flexibility, time horizon and your own confidence in the investment or insurance company.